Tuesday, September 15, 2015

Chile holds rate but to raise rate soon to curb inflation

Chile's central bank held its monetary policy rate steady at 3.0 percent, but said it would soon have to reduce the current monetary stimulus in order to lower inflation to its 3.0 percent target.
The Central Bank of Chile, which has maintained its rate this year despite rising inflation, said inflation in August surprised to the upside and it will continue to monitor its evolution "with special attention."
"In line with September’s Monetary Policy Report, the Board considers that the convergence of inflation to 3% over the policy horizon will call for a reduction in the high monetary stimulus currently in place. Considering incoming data, it is foreseen that this process will begin shortly," the central bank said.
But the central bank also noted volatility in international financial markets in connection with the risks associated with China's economy, uncertainty about the upcoming decision by the U.S. Federal Reserve and the deteriorating situation surrounding Latin America, particularly Brazil.
Chile's inflation rate jumped to 5.0 percent in August from 4.6 percent in July for the highest rate since November last year and above the bank's target of 3.0 percent, plus/minus 1 percentage point.
On Sept. 1 the central bank raised its inflation forecast for this year to 4.6 percent from a previous 3.4 percent in its latest quarterly monetary policy report.

Inflation has been fueled by higher import prices from a depreciation of the peso.

The peso has been depreciating against the U.S. dollar since the "taper tantrum" in May 2013 but has gained some ground since late August when minutes from its meeting that month showed that board members for the first time since May 2012 considered raising the rate to avoid a rise in inflationary expectations.

However, the board was still unanimous in its decision to maintain the rate in August.

The peso was trading at 684.13 to the dollar today, down 11.4 percent this year.

Meanwhile, Chile's economy, especially its exports of copper, have been hard hit by the slowdown in China and the central bank said output and demand remain weak and confidence indicators became more pessimistic.

In the second quarter, Chile's Gross Domestic Product was stagnant from the first quarter for annual growth of 1.9 percent, down from 2.5 percent in the first quarter.

In its policy report the central bank lowered its forecast for growth this year of 2.0 to 2.5 percent from its previous estimate of 2.25 to 3.25 percent.

The Central Bank of Chile issued the following statement:

"In its monthly monetary policy meeting, the Board of the Central Bank of
Chile decided to keep the monetary policy interest rate at 3% (annual).
Internationally, financial markets remain highly volatile. Risks relating to developments
in the Chinese economy stand out, as do the uncertainty surrounding the upcoming
decision of the Federal Reserve and the worsened scenario for Latin America,
particularly Brazil. Volatility has been also perceived in the prices of commodities,
especially oil and, by a smaller magnitude, copper.
Domestically, in August the CPI variation was unexpectedly high, owing largely to its
more volatile components. This drove annual inflation to 5%. Core inflation—CPIEFE—
brought no surprises with respect to the forecast. Inflation expectations rose at some
terms, and their evolution will continue to be monitored with special attention.
Meanwhile, output and demand remain weak, and confidence indicators have become
more pessimistic. Private job creation and annual wage growth show no major change
from the previous month.
In line with September’s Monetary Policy Report, the Board considers that the
convergence of inflation to 3% over the policy horizon will call for a reduction in the
high monetary stimulus currently in place. Considering incoming data, it is foreseen
that this process will begin shortly. The Board reiterates its commitment to conduct
monetary policy with flexibility, in accordance with the inflation target."